Weekly Economic Briefing: Innovation in Australia

The Weekly Economic Briefing is written by two senior Deloitte Economists, David Rumbens from Deloitte Access Economics in Australia and Ian Stewart Deloitte’s Chief Economist in the UK. They provide a personal view on topical financial and economic issues. Subscribe to receive the Weekly Economic Briefing in your inbox!

Australian economic briefing by David Rumbens

This section of the briefing provides a snapshot of key economic data and issues of relevance to Australia.

Innovation in Australia

Last week, the ABS released the 2016-17 results of its survey of the level of innovation among Australian businesses.

From a macroeconomic perspective, business innovation is a key element of productivity growth and, as such, fundamental to Australia’s ongoing economic performance.

In 2016-17, some 45% of businesses reported that they had undertaken innovation. That’s an improvement compared to six years ago, when around 39% of businesses were innovating, although the number of innovating businesses has changed little over the past couple of years.

The data indicates that large firms tend to innovate more than small firms. 70% of large businesses (those with more than 200 employees) reported that they undertook innovation activities, compared to 36% for small businesses and 58% for medium businesses (those with less than four and less than 199 employees respectively).

The story varies across sectors of the economy. The most innovative industry was information media and telecommunications, with more than 60% of businesses engaging in some form of innovative activity. The industry is certainly, and not surprisingly, at the forefront of technological change – fifth generation wireless network technology, for example, is enabling a myriad of opportunities from the Internet of Things to autonomous vehicles. Other industries with a high share of innovation were retail and wholesale trade, reflecting the competitive nature of the sector, and the related desire to cut costs.

What do businesses cite as the biggest barriers to innovating? Interestingly, they consistently report that it’s not for a lack of good ideas. While economists fret that limits in technological innovation may be inhibiting productivity growth among rich countries, this data suggests that it’s the barriers to adopting technology and other know-how that could be the issue.

In 2016-17, businesses reported that the greatest barrier to innovation was access to additional funds. Perhaps not surprisingly, this barrier was far more common among small businesses. What’s surprising, though, is that this coincides with record-low borrowing costs and a strong pick-up in business profits.

Importantly, the number of businesses that cite any barrier to innovation has declined over the past decade. In 2006-07, 62% complained of barriers to innovation; in 2016-17, this number fell to 38%.

The biggest change that businesses report is greater ease in accessing skilled persons, reflecting the fact that there is still some slack in Australia’s labour market.

Chart 1: Barriers to innovation, % of businesses

Source: ABS CAT. 8158.0

While more Australian businesses are innovating compared to a decade ago, Australia still has a long way to go by international standards. Indeed, the Global Innovation Index ranks Australia 20th in innovation. Even by regional standards, the nation sits behind Korea, Hong Kong and Japan. The drive for innovation should remain a priority for Australia as a path to higher productivity growth and higher living standards.

UK economic briefing by Ian Stewart

Britain’s recent record on growing productivity and wages has been lacklustre. In the UK GDP per hour worked, the main measure of productivity, has risen by just 2.2% since 2010, less than a third the rate seen in Germany.

Poor productivity tends to suppress wage growth. On average UK wages after inflation have fallen by 1.6% since 2010. Over the same period good productivity growth in Germany has helped lift real wages by 10%.

Yet there is another, brighter side to the UK’s poor productivity record. The UK has proved exceptionally good at creating new jobs, getting people into work, and reducing unemployment.

The number of people in work in the UK has increased by 10% since 2010, faster than in Germany or indeed most EU countries. At 4.3% the UK’s unemployment rate is lower than at any time since 1975. The UK’s jobs market is relatively accessible and inclusive, with high employment rates for women and younger and older workers. Temporary work is less common than in most OECD countries.

The World Economic Forum (WEF) ranks the UK labour market, alongside America’s, as one of the most flexible in the world. Flexibility is characterised by an efficient matching of jobs and skills through, for instance, ease of hiring and firing. Countries with high ratings for flexibility are strong on job creation and have low levels of unemployment.

The UK’s job-rich but poor wage and productivity performance contrasts with that of other European countries.

France has a less flexible labour market and lower rates of job creation than the UK. But France scores highly on absolute levels of, and growth in, productivity. By close of business on Thursday the average French worker has produced what it takes the average Brit to produce by the end of the working week. It’s harder to find a job than in the UK, but workers are more productive and pay rises faster. High employee costs and barriers to hiring may dampen job creation, but they also encourage an efficient use of labour.

The Brits are good at job creation and the French are strong on productivity. But the Holy Grail of economic policy is job and productivity-rich growth. This is pretty much what a group of north-west European countries – Germany, Switzerland, Benelux and Nordic countries – achieve. They have flexible labour markets, high employment rates and low levels of unemployment. All score highly on productivity and wage growth.

In economics perfection is rare. So, for instance, Sweden has, by Northern European standards, somewhat elevated youth unemployment and Danish job creation has lagged its neighbours. But by and large this group of countries do unusually well creating well paid, high productivity jobs.

All combine labour market flexibility with strong vocational education. Whereas in the UK, university has become the default choice after school, many young people in north-west Europe opt for training in school or college and the workplace. Switzerland arguably leads Europe in vocational education and 70% of its young people take this route.

The experience of Italy is very different from its northerly peers. It has struggled with high unemployment and poor productivity for more than two decades. Italy’s employment rate is among the lowest in the industrialised world with 58% of adults in work compared with rates of 75-80% in north-west Europe. Almost a third of young Italians are unemployed and a majority of those in work are on temporary contracts. Italy ranks at the bottom of the WEF league of labour market flexibility, below many developing economies. Since 2010 productivity has scarcely risen and average wages, after inflation, have fallen by 2.5%.

Yet none of this is set in stone. Careful reform, pursued over years, can create jobs and reboot growth. In the late 1990s Germany’s economy looked increasingly sclerotic and uncompetitive. Unemployment was stuck at intractably high rates. Hard though it may be to believe it now, in the media Germany was dubbed the “sick man of Europe”. Labour market undertaken by Chancellor Schroder’s government in the early ‘00s eased rules on hiring and firing and sharpened incentives for unemployed people to take work. The reforms faced strong resistance, but they played a crucial role into making Germany the high employment economy it is today.

The potential sources of the UK’s slow productivity growth are much debated. What is clear is that on vocational training and education the UK lags well behind the likes of Germany, Switzerland and Denmark.

This is not new. In our researches last week, we came across the report of the Royal Commission on Technical Education from 1884. A meticulous 556 pages analysis of vocational training on the Continent the report counters today’s fashionable ideas of Victorian insularity and hubris.

On the contrary, the authors were hugely impressed by what they saw: “Your Commissioners cannot repeat too often that they have been impressed with the general intelligence and technical knowledge of the masters and managers of industrial establishments on the Continent…They are familiar with every new scientific discovery of importance…They adopt not only the inventions and improvements made in their own country, but also those of the world at large”.

The report urged the UK to emulate the Continental model of rigorous vocational training, both theoretical and practical, coupled with the development of language skills. Looking at the UK’s recent performance it is a recipe that is as relevant today as it was in 1884.PS: Last week the European Union and Japan signed the world’s largest bilateral free trade agreement, lifting tariffs on nearly all goods traded between the two countries. The contrast that the deal made to the prevailing international mood of protectionism was not lost on the signatories. Donald Tusk, the president of the European council, described the deal as “light in the increasing darkness of international politics” and claimed that, “This is an act of enormous strategic importance for the rules-based international order, at a time when some are questioning this order.” Once ratified by parliaments on both sides, the EU-Japan trade deal will eliminate about 99% of tariffs on Japanese goods, while Japanese consumers will enjoy lower prices on the $100bn worth of goods and services the EU exports to Japan every year. While clearly a significant deal in economic terms, it may be at least as notable as a statement of support for free trade and globalisation.

OUR REVIEW OF LAST WEEK’S NEWS

The FTSE 100 ended the week up 0.2% at 7,679.

International economic briefing by Ian Stewart

Economics and business

Chinese GDP growth slowed to 6.7% in Q2, its slowest pace in almost two years

The yield on three-month US Treasury bills hit 2% for the first time since 2008 as the Federal Reserve Chair Jerome Powell said it was best “to keep gradually raising” interest rates

The European Commission president, Jean-Claude Juncker, said the EU will “give tit-for-tat to any [future] provocation” on trade by the US

President Trump said he was “ready” to implement tariffs on all $500bn of Chinese imports to the US

Respondents to a Bank of America fund manager survey cited a global trade war as the biggest risk to markets since the 2012 EU debt crisis

Capital expenditure by US businesses jumped 24% in Q1 due to accelerating global economic growth and US corporate tax cuts, according to Credit Suisse

ECB research showed that its quantitative easing programme did not increase consumption, wealth or income inequality

UK inflation remained below expectation at 2.4% in June despite higher oil prices due to fierce competition in the retail sector suppressing prices

UK wage growth slowed to 2.5% in the three months to May, its slowest pace in six months

UK retail sales unexpectedly fell by 0.5% in June

Sterling fell below $1.30 against the dollar for the first time in ten months on news of weak retail sales and inflation, casting doubt on an August interest rate rise

The renminbi fell to a one-year low against the dollar

Donald Trump the US president, has invited the Russian president, Vladimir Putin, to Washington this autumn

Donald Trump criticised the US Federal Reserve for its latest interest rate rises and the strength of the dollar against the euro and renminbi

The EU fined Google $5.1bn over the use of its search engine on mobile phones

President Trump hit out at the EU over the Google ruling saying, “they truly have taken advantage of the US, but not for long!”

The FT reports that almost 40% of London new-build homes were sold in bulk to corporate landlords in Q2

Microsoft shares hit a record high with sales growing by 17% in Q2 due to surging demand for its cloud services

The UK’s National Cyber Security Centre warned of risks to UK national security from the involvement in China’s Huawei in critical telecoms networks

Brexit and European politics

The Hanseatic League, a group of Nordic member states, called on the EU to “redouble” efforts to create a Capital Markets Union

In response, the EU warned that Theresa May has reneged on commitments made for the backstop in December last year

Michel Barnier, the EU’s chief Brexit negotiator, dismissed the UK’s financial services Brexit plan for “enhanced equivalence” as it would take away the EU’s “decision-making autonomy”

Former UK’s education secretary, Justine Greening, called for a second Brexit referendum which the UK government ruled out “under [all] circumstances”

Pro-EU Conservative MP, Anna Soubry, called for a cross-party “government of national unity”

The EU published a briefing on preparations for a no-deal Brexit warning that checks and tariffs would need to be applied at all EU-UK borders

CityAM reports that the EU is considering temporarily extending the two-year negotiating period under Article 50 if talks “are so advanced that [they] believe a deal can be struck”

The IMF warned that a no-deal Brexit would lead to a 1.5% fall in economic growth by 2030, with Ireland worst hit, followed by the Netherlands, Belgium and Luxembourg

The UK Treasury said it would prioritise the flow of goods over border revenue collection in the event of a no-deal Brexit

Airbus and Rolls-Royce announced that they were considering stockpiling production supplies to prepare for a no-deal Brexit

And finally…

Brighton and Hove, UK was crowned the “most hipster city in the world” in MoveHub’s latest Hipster Index, beating Portland, USA by one-thousandth of a point. The index combines five data points: the number of vegan eateries, coffee shops, tattoo studios, vintage boutiques, and record stores per 100,000 residents to give each city a score out of ten – they think it’s all Hover

David Rumbens is a Partner within Deloitte Access Economics. He is a macroeconomist with extensive experience in applied economic and quantitative analysis of the Australian economy, along with considerable experience in labour market analysis.

Ian Stewart is a Partner and Chief Economist at Deloitte where he advises Boards and companies on macroeconomics. Ian devised the Deloitte Survey of Chief Financial Officers and writes a popular weekly economics blog, the Monday Briefing. His previous roles include Chief Economist for Europe at M...

Will is a macroeconomist who has worked on a range of projects including general macroeconomic modelling and analysis, labour market analysis and econometric modelling. Will has also had experience in a number of CGE modelling projects, conducting economic impact analysis using Deloitte’s regiona...

Enter your details here to subscribe

First Name
*

Email Address
*

Deloitte Blog Newsletter

Diversity and Inclusion Newsletter

I consent to receiving future thought leadership and marketing communications from Deloitte

Deloitte Australia collects personal information when you register with us. We will use this information to provide the services requested and to provide you with thought leadership or information about services provided by us, or other Deloitte member firms, that we feel may be of interest to you. In order to provide you with this information, we may share your personal information with other Deloitte member firms or our third party service providers

Should you wish to no longer receive these communications, you can opt-out at any time by clicking on the unsubscribe link at the bottom of the communication. For more information explaining how we use your information, please see our privacy policy.